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SCHWAB ASSET DIRECTOR(@) -- HIGH GROWTH PORTFOLIO
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SCHWAB S&P 500 PORTFOLIO
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PROSPECTUS NOVEMBER 8, 1996
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CONTENTS PAGE
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Key Features of the Funds............................................................ 3
Expenses............................................................................. 5
Investment Objectives and Policies................................................... 6
Investment Techniques Used by the Funds.............................................. 7
Other Investment Techniques Used by the Funds........................................ 10
Investing in the Funds............................................................... 12
Buying and Selling Shares....................................................... 12
Important Information About the Funds................................................ 13
Dividends and Other Distributions............................................... 13
Federal Income Tax Information.................................................. 13
Share Price Calculation.............................................................. 14
How the Funds Report Performance..................................................... 14
Organization and Management of the Funds............................................. 15
Operating Fees and Expenses..................................................... 16
General Information.................................................................. 17
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READING THIS PROSPECTUS. References to "you" and "your" in this Prospectus
refer to prospective investors and/or current shareholders, while references to
"we," "us," "our" and "our Funds" refer to the two Funds generally.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Schwab Annuity Portfolios (the "Trust") is a no-load, open-end management
investment company which offers three diversified investment funds managed by
Charles Schwab Investment Management, Inc. (the "Investment Manager" or "CSIM").
This Prospectus relates to the shares of two of the Trust's three portfolios,
the Schwab Asset Director--High Growth Portfolio and the Schwab S&P 500
Portfolio (the "Funds"). The Funds are intended as an investment vehicle for
variable annuity contracts ("Contracts") and variable life insurance policies
("VLI Policies") to be offered by separate accounts ("Separate Accounts") of
participating life insurance companies ("Participating Insurance Companies") and
for pension and retirement plans qualified under the Internal Revenue Code of
1986, as amended (the "Plans").
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SCHWAB ASSET DIRECTOR - HIGH GROWTH PORTFOLIO (the "High Growth Fund"). The
investment objective of the High Growth Fund is to provide high capital growth
with less volatility than an all stock portfolio. The High Growth Fund seeks to
meet its investment objective by investing in a mix of stocks, bonds and
cash-equivalents.
SCHWAB S&P 500 PORTFOLIO (the "S&P 500 Fund"). The S&P 500 Fund seeks to track
the price and dividend performance (total return) of common stocks of U.S.
companies, as represented by the Standard & Poor's Composite Index of 500 Stocks
(the "Index"). The S&P 500 Fund invests primarily in the common stocks of
companies composing the Index.
INVESTING IN THE FUNDS. The Funds are designed to serve as an investment
vehicle to fund benefits under Contracts issued through Separate Accounts of
Participating Insurance Companies. Shares of both Funds are currently offered to
Participating Insurance Companies and their Separate Accounts to fund benefits
under Contracts. In the future, shares of both Funds may be offered to
Participating Insurance Companies and their Separate Accounts to fund benefits
under other Contracts, VLI Policies and Plans.
ABOUT THIS PROSPECTUS. THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
THAT YOU SHOULD KNOW BEFORE INVESTING IN EITHER OF THE FUNDS. PLEASE READ IT
CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. You can find more detailed
information about these Funds in the Statement of Additional Information ("SAI")
dated November 8, 1996 (as amended from time to time). The SAI has been filed
with the Securities and Exchange Commission ("SEC") and is incorporated into
this Prospectus by reference (which means that it is legally considered part of
this Prospectus even though it is not printed here). To receive a free copy of
this Prospectus or SAI, call the Annuity Service Center at Charles Schwab & Co.,
Inc. ("Schwab") at 800-838-0650 or write to P.O. Box 7785, San Francisco, CA
94120-9420; in New York State, call 800-838-0649 or write the Annuity Service
Center at P.O. Box 7806, San Francisco, CA 94120-9327.
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KEY FEATURES OF THE FUNDS
Both Funds are designed to provide investors with exposure to the growth
potential of the stock market. The High Growth Fund seeks to achieve this
through the use of an asset allocation strategy. In the past, common stocks have
outperformed most other types of securities over time. The Funds may be
appropriate for investors who have a long-term investment horizon and want the
growth potential of stock investments or an asset allocation strategy.
Common stock prices can be volatile in the short-term. Market conditions or
other company, political and economic news often can cause large changes in a
stock's price. You should be comfortable with the volatility of investment in
stocks and the risks of the stock market. When you sell your shares, they may be
worth more or less than what you paid for them. For more details on each Fund's
investments and the risks associated with them, see "Investment Objectives and
Policies" and "Investments and Techniques Used by the Funds."
HIGH GROWTH FUND: invests in a diversified mix of stocks, bonds and
cash-equivalents. It targets a mix of investments designed to provide exposure
to the growth potential of the stock market with less volatility than an all
stock portfolio. This mix among major asset classes will vary within defined
ranges based on the Investment Manager's determination of the relative
attractiveness of securities in the financial markets. For more detailed
information, see "Investment Objectives and Policies."
Research shows that the greatest impact on investment returns is due to the
asset allocation decision (the mix of stocks, bonds and cash-equivalents) rather
than market timing or individual stock and bond selections. A study of the
performance of pension portfolios indicated that over 90% of the performance was
determined by asset mix.*
*Financial Analysts Journal; Brinson, Singer, Beebower; May - June 1991.
STRATEGY: to invest in a diversified mix of stocks (large companies, small
companies and international), bonds and cash-equivalents.
[Pie Chart of Target Mix of Investments: Bonds 15%, Cash 5% and Stocks 80%]
This Fund will invest in foreign securities and small company stocks, which may
pose special risks. Foreign securities may present unique investment
opportunities; however, international investing involves risks not associated
with domestic investing. Foreign securities markets are not always as efficient
as those in the United States and are often less liquid and more volatile. Small
company stocks have historically been characterized by greater total returns,
greater volatility of returns and lower dividend yields than large company
stocks. For more detailed information on the High Growth Fund's investments and
the risks associated with them, see "Investment Objective and Policies" and
"Investments Techniques Used by the Funds."
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S&P 500 FUND: seeks to track the price and dividend performance (total return)
of common stocks of U.S. companies as represented by the Index. The Index is a
widely recognized, unmanaged index of the prices of 500 large company common
stocks selected by Standard & Poor's ("Index Stocks"). These stocks represent
approximately 70% of the market value of all common stocks publicly traded in
the United States.*
*Source: Standard & Poor's, December 1995.
STRATEGY: to invest in common stocks of companies composing the Index and to
minimize trading and other costs.
MANAGEMENT: The Investment Manager currently provides investment management
services to 29 mutual funds, in excess of $40 billion in assets as of October
25, 1996. (See "Organization and Management of the Funds.")
MARKET PERFORMANCE: For the 23 years ended 1995, the Index provided an average
annual total return of 11.9%*. Total return figures for the Index assume
reinvestment of all dividends paid by stocks included in the Index. These
figures do not include fees such as those charged by the Fund or any Separate
Account or Contract charges. They also do not include taxes, brokerage fees or
other fees that you would pay if you were to directly invest in all the stocks
of the Index. Additional asset categories to be used by the High Growth Fund
have provided the following average annual returns:**
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LARGE COMPANY STOCKS (the Index)................................. 11.9%
SMALL COMPANY STOCKS (Ibbotson and BARRA small cap index)........ 14.8%
INTERNATIONAL STOCKS (MSCI EAFE)................................. 11.8%
BONDS (Ibbotson and Lehman long-term government bond index)...... 9.6%
CASH-EQUIVALENTS (commercial paper A1P1)......................... 8.4%
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*Source: Standard & Poor's, December 1995. Past performance of the Index does
not necessarily reflect future performance results of the Index or the Funds.
**Source: BARRA, Inc. Indices do not include fees such as those charged by the
Funds or any Separate Account or Contract charges. Past performance of indices
does not necessarily reflect future performance results of the Funds.
PURCHASE, SALE AND AVAILABILITY OF SHARES OF THE FUNDS: You cannot buy or sell
shares of the Funds directly, but you may nevertheless allocate account value
under your Contract to and from the Funds in accordance with the terms of your
Contract. Please refer to the appropriate Separate Account Prospectus for
further information on how to make such allocations. (See "Investing in the
Funds.")
SHAREHOLDER COMMUNICATIONS: A representative of the Schwab Annuity Service
Center is available toll-free to assist you at 800-838-0650 or in New York State
at 800-838-0649. (See "Investing in the Funds.")
Both Funds are designed for long-term investors. Investors should not use the
Funds to speculate on short-term market movements. Doing so can disrupt the
investment strategy and operations. It also raises costs for other Fund
investors.
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EXPENSES
SHAREHOLDER TRANSACTION EXPENSES. Shareholder transaction expenses are the fees
and charges you pay for buying or selling shares of a fund. You pay no sales
fees or charges when you buy or sell shares of our Funds.
ANNUAL FUND OPERATING EXPENSES. Annual fund operating expenses include
management fees paid to the Investment Manager, transfer agency fees and other
expenses. These expenses cover services such as investment research, management
of the Funds and the issuance of shareholder statements. Each Fund pays its own
annual operating expenses from its income, which is factored into the dividends
paid to you and into the Fund's share price. You are not charged any of these
fees directly.
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HIGH GROWTH S&P 500
FUND FUND
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Shareholder Transaction Expenses....................... None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE DAILY NET ASSETS):
Management Fee (after fee reduction)(1)................ 0.60% 0.20%
12b-1 Fees............................................. None None
Other Expenses (after expense reimbursement)(2)........ 0.15% 0.15%
TOTAL FUND OPERATING EXPENSES (AFTER FEE REDUCTION AND
EXPENSE REIMBURSEMENT)(2,3).......................... 0.75% 0.35%
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(1) This amount reflects a reduction guaranteed by the Investment Manager
through at least July 1, 1997. If there were no such reduction, the maximum
management fee would be 0.74% and 0.36% of the average daily net assets of the
High Growth Fund and the S&P 500 Fund, respectively. (See "Organization and
Management of the Funds--Operating Fees and Expenses.")
(2) "Other Expenses" are based on estimated amounts for the current fiscal year
for each Fund after expense reimbursement.
(3) This amount reflects the guarantee by Schwab and the Investment Manager
that, through at least July 1, 1997, total fund operating expenses will not
exceed 0.75% and 0.35% of the average daily net assets of the High Growth Fund
and S&P 500 Fund, respectively. Without this guarantee, estimated total fund
operating expenses would be 0.89% and 0.51% of the average daily net assets of
the High Growth Fund and S&P 500 Fund, respectively.
EXAMPLES. You would pay the following expenses on a $1,000 investment in the
Funds, assuming (1) 5% annual return and (2) redemption at the end of each
period.
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1 YEAR 3 YEARS
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High Growth Fund.................................... $8 $24
S&P 500 Fund........................................ $4 $11
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THIS IS AN EXAMPLE ONLY AND DOES NOT REPRESENT PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THE EXPENSES SHOWN IN THE EXAMPLE. This
example reflects the guarantee by Schwab and the Investment Manager that,
through at least July 1, 1997, total fund operating expenses will not exceed
0.75% and 0.35% of the average daily net assets for the High Growth Fund and S&P
500 Fund, respectively. This example does not reflect Separate Account or
Contract charges. Please remember that, while this example assumes a 5% annual
return on investment, each Fund's actual returns may be more or less than the 5%
used in this example.
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THE PURPOSE OF THE TABLE ABOVE IS TO HELP YOU UNDERSTAND THE VARIOUS COSTS AND
EXPENSES YOU WILL BEAR DIRECTLY OR INDIRECTLY WHEN YOU INVEST IN THE FUNDS. (See
"Organization and Management of the Funds-- Operating Fees and Expenses.")
INVESTMENT OBJECTIVES AND POLICIES
THE HIGH GROWTH FUND
The investment objective of the High Growth Fund is to provide high capital
growth with less volatility than an all stock portfolio. The High Growth Fund
seeks to meet its investment objective by investing in a mix of stocks, bonds
and cash-equivalents. It is designed to provide exposure to the growth potential
of the stock market with less risk than an all stock investment.
A target mix of the percentage of the High Growth Fund's assets that may be
invested in stocks, bonds and cash-equivalents and the maximum and minimum
ranges in which the Fund may invest in these asset categories (the "defined
range") have been established for the High Growth Fund. Although there is a
target mix for each of the stock sub-categories, there are no defined ranges.
The amount invested in stock sub-categories could vary widely from their
targets, but not beyond the defined range of the stock category as a whole. The
Investment Manager will allocate assets among stocks, bonds and
cash-equivalents, emphasizing investment in the most attractive asset category.
Symphony Asset Management, Inc. (the "Sub-Adviser") uses a Tactical Asset
Allocation model to measure the relative value of each asset category and make
recommendations for allocations within the defined ranges. The High Growth Fund
may also make other investments that do not fall within the asset categories.
(See "Investment Techniques Used by the Funds--Other Investments.") The High
Growth Fund provides significant exposure to various stock categories, including
domestic large and small company stocks and international stocks.
The High Growth Fund's target mix as well as the defined ranges for the
different asset categories are as follows:
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TARGET DEFINED
MIX RANGES
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STOCKS................................. 80% 65%--95%
Large company stocks................. 40%
Small company stocks................. 20%
International stocks................. 20%
BONDS.................................. 15% 0%--30%
CASH-EQUIVALENTS....................... 5% 0%--35%
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THE S&P 500 FUND
The S&P 500 Fund's investment objective is to seek to track the price and
dividend performance (total return) of common stocks of U.S. companies, as
represented by the Index. The S&P 500 Fund seeks investment results that track,
rather than beat, the total return of the Index. Thus, it does not "actively"
choose investments in the same way as actively managed stock portfolios do.
Those portfolios choose investments based on economic, financial and market
factors and investment judgment. In contrast, the S&P 500 Fund uses a "passive"
or "indexing" strategy. It buys and sells stocks primarily to match the Index,
to invest cash from S&P 500 Fund share purchases or to obtain cash for
redemptions of S&P 500 Fund shares. Thus, the Investment Manager normally does
not judge the merits of any particular stock.
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Under normal market conditions, the S&P 500 Fund invests at least 80% of its
total assets in Index Stocks. The S&P 500 Fund generally tries to match its
Index Stock holdings to those Stocks' weightings in the Index. In extraordinary
circumstances, the S&P 500 Fund may exclude an Index Stock from its holdings or
include a similar stock in its place if it believes that doing so will help
achieve its investment objective. The S&P 500 Fund may purchase securities of
companies with which it may be affiliated to the extent that these companies are
represented in the Index.
Although the S&P 500 Fund focuses on Index Stocks, it may buy and sell other
equity securities and other types of instruments. It also buys and sells
short-term debt securities for cash management purposes. In addition, it may use
options and futures contracts to adjust its correlation to the Index.
The S&P 500 Fund typically will not track the performance of the Index
perfectly. Fund costs, fees and expenses impair its correlation, as do the
amounts and timing of cash inflows and outflows. Changes in the securities
markets can also inhibit perfect tracking. Over the long term, the S&P 500 Fund
will attempt to achieve a correlation of 0.9 or better between its performance
and that of the Index. A figure of 1.0 would indicate perfect correlation. The
Investment Manager monitors performance of the S&P 500 Fund and the Index on a
regular basis. In the unlikely event that the S&P 500 Fund cannot achieve a
long-term correlation of 0.9 or better, the Board of Trustees will consider
alternative arrangements.
Each Fund's investment objective is fundamental and cannot be changed without
shareholder approval. Each Fund's investment policies and techniques discussed
below are non-fundamental, unless otherwise noted. See "Investment Restrictions"
in the SAI for details. Because any investment involves risk, we cannot
guarantee achieving either Fund's objective.
INVESTMENT TECHNIQUES USED BY THE FUNDS
THE HIGH GROWTH FUND
The High Growth Fund will invest in stocks, bonds and cash-equivalents in
varying proportions, according to the Fund's target mixes and defined ranges.
STOCK ALLOCATION. The common stocks in which the High Growth Fund invests will
be a diversified portfolio among the various stock sub-categories (large
company, small company and international stocks). Common stocks represent an
ownership, or equity interest, in a company. Although common stocks have a
history of long-term growth in value, their prices tend to fluctuate in the
short-term.
LARGE COMPANY STOCKS. The High Growth Fund's large company stock allocation
will be invested in all or a representative sample of the stocks which comprise
the Index.
SMALL COMPANY STOCKS. The High Growth Fund's small company stock allocation
will be invested in all or a representative sample of stocks selected from a
universe consisting of the second 1,000 largest U.S. operating corporations, as
measured by market capitalization. Small company stocks have historically been
characterized by greater total returns, greater volatility of returns and lower
dividend yields than large company stocks.
INTERNATIONAL STOCKS. The High Growth Fund's international stock allocation
will be invested in all or a representative sample of stocks selected from a
universe consisting of 350 of the largest non-U.S. operating corporations, as
measured by market capitalization. These international stocks are issued by
large, publicly traded companies from countries around the world with major
developed securities markets, excluding the United States. The High Growth Fund
may also invest up to 5% of its net assets in the stocks and bonds of issuers in
developing countries; see "Other Investments" for details.
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BOND ALLOCATION. Bond investments for the High Growth Fund will consist
primarily of U.S. Government obligations, highly rated corporate debt
obligations and highly rated asset-backed securities. The debt securities in
which the High Growth Fund invests are obligations issued or guaranteed by the
U.S. Government and its agencies and instrumentalities, including bills, notes,
bonds, discount notes, stripped government securities and other debt securities.
Not all obligations issued or guaranteed by U.S. Government agencies are backed
by the full faith and credit of the United States. The High Growth Fund may also
buy domestic and foreign issues of corporate debt obligations that have floating
or fixed rates of interest. Asset-backed securities, including mortgage-related
securities, may also be included in the High Growth Fund's portfolio.
Asset-backed securities are secured by company receivables, home equity loans,
truck and auto loans, leases and credit card receivables. The collateral backing
asset-backed securities cannot be foreclosed upon. Mortgage-backed securities
are securities collateralized by pools of mortgage loans and are assembled by
various governmental agencies and organizations, such as Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC"). When interest rates
decline, there is an increased likelihood that the mortgages underlying a
mortgage-backed security will be pre-paid, resulting in the loss of any
unamortized premium paid for the securities and the probability of having to
reinvest the proceeds at lower rates. The bond category also includes repurchase
agreements collateralized by eligible investments.
The corporate debt obligations or the asset-backed obligations in which the High
Growth Fund invests will be rated in one of the three highest categories ("A" or
better) by a nationally recognized statistical rating organization ("NRSRO").
CASH-EQUIVALENT ALLOCATION. The High Growth Fund may invest in the following
types of U.S. dollar denominated short-term money market instruments that the
Investment Manager has determined to present moderate credit risk:
1. Bank certificates of deposit, time deposits or bankers' acceptances of
domestic banks (including their foreign branches), U.S. branches of foreign
banks and foreign branches of foreign banks, that have capital, surplus and
undivided profits in excess of $100 million.
2. Commercial paper rated in one of the two highest rating categories by an
NRSRO, or commercial paper or notes of issuers with an unsecured debt issue
outstanding currently rated in one of the two highest rating categories by any
NRSRO where the obligation is on the same or a higher level of priority and
collateralized to the same extent as the rated issue.
3. Obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
4. Repurchase agreements involving obligations that are suitable for investment
under the categories set forth above.
OTHER INVESTMENTS. The High Growth Fund may also make other investments that do
not fall within the asset classes described above. These may include warrants,
convertible securities, preferred stocks, real-estate related investments,
precious metal related investments, American and European Depository Receipts,
and stocks and bonds of issuers in developing countries. Each of these
investments is limited to 5% of the High Growth Fund's net assets. In addition,
the High Growth Fund may invest in other securities in the future or other
securities not presently contemplated or currently available. These additional
investments must be consistent with the High Growth Fund's investment objective
and must be legally permissible investments for the High Growth Fund.
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RISK CONSIDERATIONS. The High Growth Fund seeks to reduce overall risk by
diversifying investments among major asset categories and sub-categories.
However, depending on the Investment Manager's asset allocation decisions with
regard to the mix of stocks, bonds and cash-equivalents, shareholders in the
High Growth Fund may be exposed to the risks associated with each particular
asset type. Diversification among asset categories will not necessarily protect
the High Growth Fund from loss.
Stock risk is the possibility that stock prices will decline over short or even
extended periods. Small-company and international stocks will typically be
included in the mix and pose special risks.
Since the High Growth Fund's international investments will be denominated in a
foreign currency, international risk includes the possibility that the value of
the investments will be affected by changes in currency exchange rates in
addition to normal market fluctuations. The rate of exchange between the U.S.
dollar and other currencies is determined by the forces of supply and demand in
the foreign exchange market, by changes in interest rates, as well as by
political and economic factors. Other risks and considerations of international
investing include: differences in accounting, auditing and financial reporting
standards; generally higher transaction costs on foreign portfolio transactions;
small trading volumes and generally lower liquidity of foreign stock markets,
which may result in greater price volatility; foreign withholding taxes payable
on the High Growth Fund's security holdings, which may reduce dividend income
payable to shareholders; the possibility of expropriation, nationalization or
confiscatory taxation; adverse changes in investment or exchange control
regulations; political instability, which could affect U.S. investment in
foreign countries; and potential restrictions on the flow of international
capital.
Bond risk is the potential for decline in the market value of bonds due to
interest rate changes or the ability of an issuer to meet its obligations. The
market value of the High Growth Fund's debt investments will change in response
to interest rate fluctuations and other factors. During periods of falling
interest rates, the values of outstanding debt securities generally rise;
conversely, during periods of rising interest rates, the values of such
securities generally decline. While securities with longer maturities tend to
produce higher yields, the prices of longer maturity securities are also subject
to greater market fluctuations as a result of changes in interest rates. Changes
by NRSROs in the rating of any debt security and in the ability of an issuer to
make payments of interest and principal also affect the value of these
investments. Except under condition of default, changes in the value of
portfolio securities will not affect cash income derived from these securities
but will affect the High Growth Fund's net asset value.
THE S&P 500 FUND
In seeking its objective, the S&P 500 Fund may buy and sell the investments and
employ the techniques described below. Please see the SAI for more details. The
S&P 500 Fund's investment policies and restrictions apply at the time the S&P
500 Fund makes an investment. Except with respect to futures and options, later
changes, such as changed market values, do not require the S&P 500 Fund to sell
an investment even if it could not then make the same investment.
EQUITY SECURITIES. Equity securities are ownership interests in the net worth
of a corporation. They include common stocks, preferred stocks, convertible
securities and warrants. In the past, they have outperformed most other
securities over time, though their prices can be volatile in the short term.
Market
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conditions or other company, political and economic news often can cause large
changes in a stock's price for the short term or long term. Smaller company
securities are especially sensitive to these factors.
OTHER INVESTMENTS. While the S&P 500 Fund tries to remain invested in Index
Stocks as fully as possible, it must manage cash flows resulting from the
purchase and sale of Fund shares. Thus, the S&P 500 Fund also may invest in U.S.
dollar denominated short-term bonds and money market instruments. The S&P 500
Fund may buy debt securities of or guaranteed by the U.S. Government, its
agencies or related bodies. It also may use certificates of deposit, time
deposits and bankers' acceptances. The S&P 500 Fund also may buy commercial
paper if the commercial paper has one of an NRSRO'S top two ratings or has
comparable quality if it is unrated. The S&P 500 Fund may enter into repurchase
agreements using any of these debt securities. It also may buy and sell shares
of other mutual funds to manage its cash flows.
RISK CONSIDERATIONS. Investing in the S&P 500 Fund will expose investors to
stock risk because it invests in substantially all of the 500 common stocks
composing the Index. Prices of many stocks or of a single stock may decline over
short or even long periods. However, diversity of stock holdings tends to reduce
stock risk. Because the Fund owns so many different stocks, it is less sensitive
to the decline of any one of them than if it were to invest in fewer stocks. The
wide range of industries represented in this Fund's holdings also tends to
lessen the impact of one industry's decline. Even so, these factors cannot
protect you from all possible losses. Also, to better track the investment
results of the Index, the S&P 500 Fund may engage in certain stock futures
contracts and options, which are types of derivative transactions. Their
potential return and risk can vary widely from type to type. See "Investment
Securities" in the SAI for details about the derivatives that the S&P 500 Fund
uses and the limits on them. You should pay special attention to these
descriptions of derivatives, for these investments carry more risk potential
than the S&P 500 Fund's other investments.
OTHER INVESTMENT TECHNIQUES USED BY THE FUNDS
FUTURES CONTRACTS AND OPTIONS. Each of the Funds may use futures contracts and
options in order to remain effectively fully invested in proportions consistent
with the Investment Manager's current asset allocation and to track the Index in
an efficient and cost-effective manner. Specifically, each Fund may enter into
futures contracts and options thereon provided that the aggregate deposits
required on these contracts do not exceed 5% of each Fund's total assets. In
addition, certain provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), may limit the Funds' use of futures contracts and options.
Futures contracts and options may be used for several reasons: to reallocate the
High Growth Fund's assets among stocks, bonds and money market instruments while
minimizing transaction costs; to maintain cash reserves while simulating full
investment; to facilitate trading; or to seek higher investment returns or
simulate full investment when a futures contract is priced more attractively or
is otherwise considered more advantageous than the underlying security or index.
In addition, the S&P 500 Fund may use futures contracts and options to more
closely track the performance of the Index, or to re-allocate its assets among
Index Stocks while minimizing transaction costs.
Because the transaction costs of futures contracts and options may be lower than
the costs of investing in stocks or bonds directly, it is expected that the use
of futures contracts may reduce the Fund's total transaction costs. Also,
because futures contracts require only a small initial margin deposit, the Funds
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would then be able to simultaneously maintain a cash reserve for potential
redemptions and simulate full investment. In the event of net redemptions from a
Fund, sufficient futures contracts would be sold to avoid any leveraging of the
Fund's assets.
Futures contracts and options pose certain risks. The primary risks associated
with the use of futures contracts and options include: imperfect correlation
between the change in market value of the securities held by the Funds and the
prices of futures contracts and options, and possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect correlation will be
minimized by investing only in those contracts the behavior of which is expected
to resemble that of the Funds' underlying securities. The risk that the Funds
will be unable to close out a futures position will be minimized by entering
into such transactions on a national exchange with an active and liquid
secondary market. While futures contracts and options can be used as leveraged
instruments, the Funds may not use futures contracts or options to leverage
their portfolios.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in an immediate and substantial
loss (or gain) to the investor. When the Funds invest in futures contracts, they
will segregate cash or cash-equivalents in the amount of the underlying
obligation.
ADJUSTING INVESTMENT EXPOSURE. In addition to futures and options, the High
Growth Fund may use a variety of techniques to increase or decrease its exposure
to changing security prices, interest rates, currency exchange rates, commodity
prices, or other factors that affect security values. These techniques may
involve entering into spot foreign currency exchange contracts, forward foreign
currency exchange contracts and swap agreements. These techniques may be
referred to as derivative transactions.
The Funds may also sell securities short if, at the time of the short sale, the
Fund owns or has the right to own securities equivalent in kind and amount to
the securities sold short at no additional cost. The Investment Manager can use
these practices to adjust the risk and return characteristics of a Fund's
portfolio. If the Investment Manager judges market conditions incorrectly or
employs a strategy that does not correlate well with a Fund's investments, these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. These techniques may increase the volatility of
the Funds and may involve a small investment of cash relative to the magnitude
of the risk assumed. In addition, these techniques could result in a loss if the
counterparty to the transaction does not perform as agreed. Each of these
techniques will be limited to 5% of each Fund's net assets. Please refer to the
sections in the SAI entitled "Investment Securities" and "Investment
Restrictions" for a more detailed discussion of these techniques and the risks
associated with them.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. Generally, an "illiquid security" is any security that
cannot be disposed of promptly and in the ordinary course of business at
approximately the amount at which a Fund has valued the instrument. The absence
of a trading market can make it difficult to ascertain the market value of
illiquid securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Funds may purchase
securities on a "when-issued" or "delayed delivery" basis. When-issued or
delayed delivery securities are securities purchased for future delivery at a
stated price and yield. Generally, the Funds will not pay for such securities or
start earning interest on them until the Fund receives them. Securities
purchased on a when-issued or delayed delivery basis are recorded as assets.
During the period between the agreement date and the settlement date, the value
of such securities may change as the prices of securities in the stock market
increase or
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decrease, or as interest rates change. Default by the other party to the
agreement may result in a loss to a Fund.
REPURCHASE AGREEMENTS. The Funds may engage in repurchase agreements. In a
repurchase agreement, a Fund buys a security at one price and simultaneously
agrees to sell it back at a higher price. In the event of a bankruptcy or other
default of a repurchase agreement counterparty, the Fund may incur expenses in
enforcing its rights, and could experience losses, including a decline in the
value of the underlying securities and loss of income.
BORROWING POLICY. The Funds may not borrow money except for temporary purposes
to meet redemption requests that could not otherwise be met without immediately
selling portfolio securities. The Funds may borrow an amount up to one-third of
the value of the Fund's total assets and may pledge up to 33 1/3% of the Fund's
net assets to secure such borrowings. The Funds may not borrow for leverage
purposes. The Funds' borrowing and pledging policies, as set forth in the SAI,
are fundamental. Borrowing money may cause greater fluctuations in a Fund's
share price.
SECURITIES LENDING. The Funds may lend up to 33 1/3% of their portfolio
securities to broker-dealers as a means of increasing income. These loans must
be fully collateralized at all times. As with any collateralized loan, there are
risks of delay in recovery or even losses of rights in the assets loaned should
the borrower fail financially.
TURNOVER. The Investment Manager anticipates that the S&P 500 Fund's annual
turnover rate will not exceed 100%. The Investment Manager anticipates that the
High Growth Fund's annual turnover rates for the stock and bond categories of
its portfolio will not exceed 100%.
INVESTING IN THE FUNDS
BUYING AND SELLING SHARES
Shares of the Funds are currently sold on a continuous, no-load basis to the
Separate Accounts of Participating Insurance Companies to fund benefits under
Contracts issued by the Participating Insurance Companies.
Although shares of the Funds are not available for purchase directly by the
general public, you may nevertheless allocate account value under your Contract
to and from the Funds in accordance with the terms of your Contract. Please
refer to the appropriate Separate Account Prospectus for further information on
how to make an allocation and how to purchase or surrender your Contract.
The Funds reserve the right, in their sole discretion and without prior notice
to shareholders, to withdraw or suspend all or any part of the offering made by
this Prospectus or to reject purchase orders. All orders to purchase shares of
the Funds are subject to acceptance by the Funds and are not binding until
confirmed or accepted in writing.
The Funds may suspend redemption rights or postpone payments any time when
trading on the New York Stock Exchange (the "Exchange") is restricted; or the
Exchange is closed for any reason other than its customary weekend or holiday
closings, emergency circumstances as determined by the SEC exist or for any
other circumstances as the SEC may permit.
In the future, shares of the Funds are expected to be offered on a continuous,
no-load basis to affiliated and unaffiliated Participating Insurance Companies
and their Separate Accounts to fund benefits under Contracts and VLI Policies as
well as to Plans. The relationships of Plans and Plan participants to the
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Funds would be subject, in part, to the provisions of the individual Plans and
applicable law. Accordingly, such relationships could be different from those
described in this Prospectus for Separate Accounts and Contract owners in such
areas, for example, as tax matters and voting privileges.
The Funds do not foresee any disadvantage to Contract or VLI Policy owners or
Plan participants arising out of these arrangements. Nevertheless, differences
in treatment under tax and other laws, as well as other considerations, could
cause the interests of various purchasers of Contracts and VLI Policies (and the
interests of any Plan participants) to conflict. Material irreconcilable
conflicts between the interests of Contract owners, VLI Policy owners or Plan
participants possibly may arise. For example, violation of the federal tax laws
by one Separate Account investing in the Funds could cause the Contracts funded
through another Separate Account to lose their tax-deferred status, unless
remedial action were taken. The Funds and the Separate Accounts (and any Plans
investing in the Funds) would be subject to conditions imposed by the SEC, which
are designed to prevent or remedy any such conflicts.
If shares of the Funds are offered to affiliated and unaffiliated Participating
Insurance Companies and their Separate Accounts to fund benefits under VLI
Policies and other Contracts and to Plans, the Board of Trustees will monitor
events in order to identify the existence of any material irreconcilable
conflict that may possibly arise and to determine what action, if any, should be
taken in response to any such conflict. If a material irreconcilable conflict
arises involving Separate Accounts or Plans, a Separate Account or Plan may be
required to withdraw its participation in either Fund.
Shares of the Funds are sold at the net asset value next determined after
receipt by the Funds of purchase requests in proper form.
Shares will be redeemed at the net asset value per share next determined after
receipt by the Funds of proper redemption instructions, as set forth below.
Redemption proceeds will normally be wired to a Participating Insurance Company
on the next Business Day after receipt of the redemption instructions by the
Funds but in no event later than 7-days following receipt of instructions.
Please refer to the appropriate Separate Account Prospectus for information on
how to allocate Contract values to or withdraw Contract values from a Fund.
To obtain additional information regarding the Funds, call the Schwab Annuity
Service Center at 800-838-0650 or in New York State at 800-838-0649, where
trained representatives are available to answer questions about the Funds.
IMPORTANT INFORMATION ABOUT THE FUNDS
DIVIDENDS AND OTHER DISTRIBUTIONS
Each of the Funds will distribute substantially all of its net investment income
each year, as determined by the Board of Trustees. The Funds will distribute net
investment income and capital gains, if any, to the Participating Insurance
Company Separate Accounts annually in December. Distributions are normally paid
or reinvested pursuant to elections by Separate Accounts.
FEDERAL INCOME TAX INFORMATION
Each Fund intends to qualify as a regulated investment company under the Code.
In order to so qualify, the Funds will distribute on a current basis
substantially all of their investment company taxable income and their net
capital gains (if any) on an annual basis and will meet certain other
requirements. Such
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qualification relieves each Fund of liability for federal income taxes to the
extent each Fund's earnings are distributed. Income received by either Fund from
sources within certain foreign countries, however, may be subject to foreign
taxes withheld at the source.
Internal Revenue Service regulations applicable to Separate Accounts generally
require that portfolios that serve as the funding vehicles for Separate Accounts
invest no more than 55% of the value of their total assets in one investment,
70% in two investments, 80% in three investments and 90% in four investments.
Alternatively, a portfolio will be treated as meeting these requirements for any
quarter of its taxable year if, as of the close of such quarter, the portfolio
meets the diversification requirements applicable to regulated investment
companies (see "Federal Income Taxes" in the SAI) and no more than 55% of the
value of its total assets consists of cash and cash items (including
receivables), U.S. Government securities and securities of other regulated
investment companies. The Funds intend to meet these requirements. Internal
Revenue Service regulations also limit the types of investors that may invest in
such a portfolio. The Funds intend to meet this limitation by offering shares
only to Participating Insurance Companies and their Separate Accounts in
connection with the purchase of Contracts and VLI Policies and to Plans.
For more information regarding the federal income tax consequences of investing
in the Funds, see "Federal Income Taxes" in the SAI. For information concerning
the tax consequences of Contract ownership, Contract owners should consult the
appropriate Separate Account Prospectus.
SHARE PRICE CALCULATION
The price of a share on any given day is its "net asset value" or "NAV." This
figure is computed by taking each Fund's total assets, subtracting any
liabilities and dividing the resulting amount by the number of that Fund's
outstanding shares. The net asset value per share of each Fund is determined on
each day the Exchange is open for business as of the close of normal business
(generally 4:00 p.m. Eastern time). Purchase and redemption orders from Separate
Accounts investing in a Fund that are received and accepted by a Participating
Insurance Company, as the Fund's designee, by 4:00 p.m. Eastern time will
generally be computed at each Fund's NAV determined on that day.
The Funds value their portfolio securities based on market quotes if they are
readily available. If they are not readily available, the Investment Manager
assigns fair values to each Fund's assets in good faith under Board of Trustees
guidelines. The Board of Trustees regularly reviews these values.
HOW THE FUNDS REPORT PERFORMANCE
From time to time the Funds may advertise their total return and yield. These
figures reflect past results and are not intended to predict future performance.
We will often compare a Fund's performance to the Index, other indices or a
combination of indices.
Total return measures the percentage change in the value of an investment over
time. It reflects all share price movements, distributions and expenses. It
assumes the reinvestment of all distributions. Average annual total return is a
measure of the yearly changes in the value of the investment. It is the constant
compound rate of return, which, if applied to the investment each year, would
result in the actual total return over that time. Other total return figures we
show may differ. We may base them on non-standard periods. We may also show
aggregate or cumulative returns.
Yield refers to the income generated by an investment in a Fund over a given
period. It is expressed as an annualized percentage rate. Each Fund calculates
yields according to an SEC standard for all stock and
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bond portfolios. Because this differs from other accounting methods, the Funds
may quote a yield not equal to the income actually paid out by the Funds.
Performance information quoted for each Fund includes the effect of deducting
the Fund's expenses but may not include charges and expenses attributable to a
particular Contract. You cannot purchase shares of the Funds directly, but you
may allocate account value under your Contract to and from the Fund in
accordance with the terms of your Contract. You should carefully review the
appropriate Separate Account Prospectus for information on charges and expenses
relevant to your Contract. Excluding these charges from quotations of a Fund's
performance has the effect of increasing the performance quoted. You should bear
in mind the effect of these charges when comparing the Funds' performance to
those of other mutual funds.
ORGANIZATION AND MANAGEMENT OF THE FUNDS
GENERAL OVERSIGHT OF OUR FUNDS. The Board of Trustees and officers meet
regularly to review each Fund's investments, performance, expenses and other
business affairs.
THE INVESTMENT MANAGER. The Investment Manager manages each Fund's business
affairs. Its actions are subject to the authority of the Board of Trustees and
officers of the Trust. The Investment Manager also manages each Fund's
investments. It places all orders for each Fund's securities transactions. The
Investment Manager, founded in 1989, is a wholly owned subsidiary of The Charles
Schwab Corporation and is the investment adviser and administrator of the Schwab
mutual fund complex, which as of October 25, 1996, had aggregate net assets in
excess of $40 billion.
Geri Hom is the portfolio manager for the S&P 500 Fund and for the equity
portions of the High Growth Fund. She joined Schwab in March 1995 as Fund
Manager--Equities and currently manages the 5 Schwab index funds and the equity
portions of the 3 Schwab Asset Director(@) funds with combined assets of over
$1.7 billion. For 4 years before joining Schwab, she was a Principal for Wells
Fargo Nikko Investment Advisors. For the prior 7 years, she was Vice President
and Manager of the Domestic Equity Fund Management Group for Wells Fargo Nikko.
Andrea Regan is the portfolio manager for the bond portion of the High Growth
Fund. She joined Schwab in January 1991 and is currently Fund Manager--Fixed
Income. She currently manages 3 money market funds and 2 bond funds with
combined assets of approximately $3 billion.
Stephen B. Ward, Senior Vice President and Chief Investment Officer, has overall
responsibility for the day-to-day operations of the Funds. He is the supervising
Portfolio Manager for the Investment Manager.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Schwab, 101 Montgomery Street, San
Francisco, California 94104, serves as shareholder services agent, transfer
agent and distributor for the Funds. Schwab was established in 1971 and is one
of America's largest discount brokers. The firm provides low-cost securities
brokerage and related financial services to over 3.3 million active customer
accounts and has over 230 branch offices. Schwab also offers convenient access
to financial information services and provides products and services that help
investors make investment decisions. Schwab is a wholly owned subsidiary of The
Charles Schwab Corporation. Charles R. Schwab is the founder, Chairman, Chief
Executive Officer and a Director of The Charles Schwab Corporation. As a result
of his beneficial ownership interests in and other relationships with The
Charles Schwab Corporation and its affiliates, Mr. Schwab may be deemed to be a
controlling person of Schwab and the Investment Manager.
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THE SUB-ADVISER. The Investment Manager has retained Symphony Asset Management,
Inc. to serve as Sub-Adviser to the High Growth Fund. The Sub-Adviser will
recommend to the Investment Manager the asset mix within the defined ranges for
the Fund. The Sub-Adviser employs a Tactical Asset Allocation model to measure
relative values among asset categories. Using this model, the Sub-Advisor
recommends asset allocations it believes will provide the highest returns for a
given level of risk. The Sub-Adviser does not recommend the purchase or sale of
individual securities.
The Sub-Adviser was established in 1994 as a wholly-owned subsidiary of BARRA,
Inc. ("BARRA"). BARRA, founded in 1975 provides innovative analytical models,
software and services that enable its more than 800 clients in 30 countries to
make superior investment decisions. BARRA's software and services analyze
equity, fixed income, currency and other financial markets. The Sub-Adviser
presently serves as Sub-Adviser to two other investment companies and manages
directly and indirectly over $700 million in institutional and private account
assets.
OPERATING FEES AND EXPENSES
The Investment Manager provides investment management services under the terms
of its Investment Advisory and Administration Agreement with the Trust. For
these services, it is entitled to a graduated annual fee payable monthly from
each Fund. For the High Growth Fund the rate is 0.74% of the first $1 billion of
its average daily net assets; 0.69% of the next $1 billion; and 0.64% of net
assets over $2 billion. For the S&P 500 Fund, the rate is 0.36% of the first $1
billion of its average daily net assets; 0.33% of the next $1 billion; and 0.31%
of net assets over $2 billion.
Through at least July 1, 1997, the Investment Manager guarantees that the
management fees for the High Growth Fund will not exceed 0.60% of its average
daily net assets, and for the S&P 500 Fund, the management fees will not exceed
0.20% of its average daily net assets.
Through at least July 1, 1997, the Investment Manager and Schwab also guarantee
that total operating expenses of the High Growth Fund will not exceed 0.75% of
its average daily net assets and total operating expenses of the S&P 500 Fund
will not exceed 0.35% of its average daily net assets. For purposes of this
guarantee, "operating expenses" do not include interest expenses, taxes, foreign
taxes paid or withheld and capital items such as costs of purchase or sale of
portfolio securities, including brokerage fees or commissions. The effect of
this voluntary expense limitation is to maintain or increase total return to
shareholders.
The Investment Manager pays the Sub-Adviser an annual fee, payable monthly,
ranging from 0.08% to 0.02% of the High Growth Fund's combined average daily net
assets, declining as assets increase. The Sub-Adviser does not receive
compensation directly from the High Growth Fund.
Schwab serves as the distributor for the Funds but receives no compensation for
this service. The High Growth Fund's custodian is State Street Bank, and the S&P
500 Fund's custodian is PNC Bank, NA.
OTHER EXPENSES. The Trust pays the expenses of each Fund's operations. These
expenses include the fees and expenses for independent accountants, legal
counsel and custodians; the costs of maintaining books and records of account;
the fees and expenses of qualifying the Trust and its shares for distribution
under federal and state securities laws; and industry association membership
dues. The Funds seek to keep transaction costs and other expenses low. These
expenses will generally be allocated among the Trust's investment
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portfolios on the basis of relative net assets at the time the expense is
incurred. However, such expenses directly attributable to a particular Fund will
be charged to that Fund.
FUND BROKERAGE. When placing orders for each Fund's securities transactions,
the Investment Manager uses its judgment to obtain the best price and execution.
It considers the full range and quality of brokerage services available in
making these determinations. For securities transactions in which Schwab is not
a principal, the Investment Manager may use Schwab or other qualified affiliated
brokers or dealers to execute each Fund's transactions. To do so, it must
reasonably believe that commissions or prices paid to and transaction quality
received from Schwab or other qualified affiliated brokers or dealers will be at
least comparable to those available from qualified non-affiliated brokers or
dealers.
GENERAL INFORMATION
The Trust was organized as a business trust under the laws of Massachusetts on
January 21, 1994 and may issue an unlimited number of shares of beneficial
interest in one or more investment portfolios or series ("Series"). Currently, 3
Series are offered. The Board of Trustees may authorize the issuance of shares
of additional Series, if it deems it desirable. Shares within each Series have
equal, noncumulative voting rights and equal rights as to distributions, assets
and liquidation.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. The Trust is not required to hold
annual shareholders' meetings. It will, however, hold special meetings as the
Board of Trustees requires or deems desirable for purposes such as changing a
Fund's fundamental policies, electing or removing Trustees, or approving or
amending an investment advisory agreement. In addition, a Trustee may be removed
by shareholders at a special meeting called upon the written request of
shareholders owning in the aggregate at least 10% of the outstanding shares of
the Trust. The Funds acknowledge that the voting rights held by Participating
Insurance Companies and their Separate Accounts will be passed through to
Contract owners.
Contract owners will vote by Series and not in the aggregate (for example, when
voting to approve the investment advisory agreement), except when voting in the
aggregate is permitted under the 1940 Act, such as for the election of Trustees.
S&P 500 LICENSE. The S&P 500 Fund is not sponsored, endorsed, sold or promoted
by Standard & Poor's ("S&P"). S&P makes no representation or warranty, express
or implied, to the shareholders of the S&P 500 Fund or any member of the public
regarding the advisability of investing in securities generally or in the S&P
500 Fund particularly or the ability of the Index to track general stock market
performance. S&P's only relationship to the S&P 500 Fund is the licensing of
certain trademarks and trade names of S&P and of the Index, which is determined,
composed and calculated by S&P without regard to the S&P 500 Fund. S&P has no
obligation to take the needs of the S&P 500 Fund or its shareholders into
consideration in determining, composing or calculating the Index. S&P is not
responsible for and has not participated in the determination of the prices and
amount of S&P 500 Fund shares, the timing of the issuance or sale of S&P 500
shares or in the determination or calculation of the equation by which the S&P
500 Fund's shares are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the S&P
500 Fund's shares.
S&P does not guarantee the accuracy and/or the completeness of the Index or any
data included therein, and S&P shall have no liability for any errors, omissions
or interruptions therein. S&P makes no warranty,
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express or implied, as to results to be obtained by the S&P 500 Fund, its
shareholders or any other person or equity form the use of the Index or any data
included therein. S&P makes no express or implied warranties and expressly
disclaims all warranties of merchantability or fitness for a particular purpose
or use with respect to the Index or any data included therein. Without limiting
any of the foregoing, in no event shall S&P have any liability for any special,
punitive, indirect or consequential damages (including lost profits), even if
notified of the possibility of such damages.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR
THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
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